Latest / The Financial Exchange Show / Hot Inflation, Falling Bond Yields, and Cracks in the AI Boom

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Hot Inflation, Falling Bond Yields, and Cracks in the AI Boom · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Chuck Zotta and Mike Armstrong.
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  Speaker 2: Chuck, Mike, Tucker with you here today. And I got
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  Speaker 2: to tell you, Mike, this, the last 48 hours.
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  Speaker 2: Has been one of my favorite 48-hour periods of the
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  Speaker 2: year in markets and economic data. Not because it's all
• 1:26
  Speaker 2: been good, but because it's been very, very interesting. And
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  Speaker 2: I think there are some key insights that investors need
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  Speaker 2: to take from what has happened yesterday and today. So
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  Speaker 2: let's start with yesterday. Yesterday, 8.30 a.m., we get a... Tucker,
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  Speaker 2: what was the inflation report?
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  Speaker 4: Hey, London.
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  Speaker 3: Somebody was ready. Yes, yes, it was. And you could
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  Speaker 3: even say that it was.
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  Speaker 1: What?
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  Speaker 3: I wanted another one.
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  Speaker 5: Got it.
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  Speaker 2: So, it was muy caliente. Like, it was just, it
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  Speaker 2: was roasty. And so, what we ended up with yesterday
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  Speaker 2: was a core inflation rate that came in at. 33 %. Supercore,
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  Speaker 2: excluding Shelter, came in at 0.4% and is now running 4.6%
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  Speaker 2: annualized for the last three months. So the immediate move
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  Speaker 2: in bonds was, uh-oh, we need to sell off. So
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  Speaker 2: the 10-year, I was watching this yesterday, it was at
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  Speaker 2: 518 before the CPI report. It blew out to 5.34%,
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  Speaker 2: like touching almost as high as it's been this cycle.
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  Speaker 2: And so I'm watching it and I'm going... Okay, like,
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  Speaker 2: let's see how this, you know, ends up playing. And
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  Speaker 2: then yields just bled lower throughout the day. It was
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  Speaker 2: just like, if you look at it, it's just this
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  Speaker 2: 45-degree angle down over the course of the day to
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  Speaker 2: the point where when we closed yesterday, 10-year at around
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  Speaker 2: 4 p.m. was sitting there back at 5.18%. And you're like, okay, like,
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  Speaker 2: I'm glad we did that. And then overnight in the
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  Speaker 2: early part of the evening session, 10-year gaps down again
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  Speaker 2: to 515 and keeps bleeding lower to get to 5-1 overnight.
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  Speaker 2: PPI gets released this morning. The producer price index report
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  Speaker 2: comes out at 8.30 a.m. Mike, actually, other Mike, Michael Scott,
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  Speaker 2: how was it?
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  Speaker 3: Feeling hot, hot, hot.
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  Speaker 2: Yes, exactly. Even Muir Caliente here. It was 1.3% month
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  Speaker 2: over month. as opposed to expectations of 0.5% month over month.
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  Speaker 2: The core number came in at 0.7% versus expectations of 0.3%.
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  Speaker 2: And so PPI, even if you pull out the energy
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  Speaker 2: side of things, it is just screaming hot because diesel
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  Speaker 2: bleeds into everything.
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  Speaker 4: Yeah, the producer price, like on consumer price index data
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  Speaker 4: that we're seeing right now.
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  Speaker 3: It is... It is hot.
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  Speaker 4: It is not anywhere near as bad as it was
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  Speaker 4: in twenty twenty two. We could get there again.
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  Speaker 3: I'm not debating that.
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  Speaker 4: But like, you know, in twenty twenty two, what do
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  Speaker 4: we top out like eight point eight percent on CPI?
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  Speaker 2: I think nine one is where we got to.
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  Speaker 3: You're in the ballpark. Yes.
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  Speaker 4: So we're much lower than where we are. We're back
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  Speaker 4: then on the producer price index side of things. We
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  Speaker 4: are hitting price levels or rates of inflation rather that
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  Speaker 4: we haven't seen since twenty twenty two. on the producer
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  Speaker 4: end of things.
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  Speaker 2: And I think Mike, not just that, we only have
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  Speaker 2: one reading in 2022 that was as hot as this, right?
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  Speaker 2: There was one March of 22 PPI came in at one, six, 5%, uh,
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  Speaker 2: for the month.
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  Speaker 3: That's the only one that was hotter than this, right?
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  Speaker 3: That's it.
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  Speaker 2: And so like, again, a big chunk of that is diesel,
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  Speaker 2: like make no bones about it, but let's talk about
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  Speaker 2: what's going on on the core PPI. Like, strip out
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  Speaker 2: the food, strip out the fuel, and tell me what's
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  Speaker 2: going on there. 0.7%. Again, you look back at the
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  Speaker 2: last five years, like, including 2022, I've got one, two, three, four,
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  Speaker 2: five readings. Sorry, six readings higher in the last five years.
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  Speaker 2: So out of 60 readings, there's six that are higher.
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  Speaker 2: That's not great.
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  Speaker 3: It's not great.
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  Speaker 2: And so the interesting thing, though, is not what that showed.
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  Speaker 2: The interesting thing, that comes out, bond yields scream lower again,
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  Speaker 2: down another five basis points. Now, this is where we
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  Speaker 2: get into kind of these cross-asset signals and, hey, what's
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  Speaker 2: everything telling us in the aggregate? Bonds are screaming lower.
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  Speaker 2: What you would expect is if bonds are moving lower,
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  Speaker 2: dollar's going to be moving lower as well because, hey,
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  Speaker 2: if you're not getting paid as much interest to hold dollars,
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  Speaker 2: capital's going to go and look somewhere else.
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  Speaker 3: Got it.
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  Speaker 2: Dollar off half a percent today.
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  Speaker 3: Makes sense.
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  Speaker 2: Gold screaming higher, up 68 bucks, reversing all of yesterday's losses.
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  Speaker 3: So you look at this and you.
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  Speaker 2: Go, okay, I got two hot inflation reports and bonds
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  Speaker 2: can't find... Anyone who wants to sell them now. Remember,
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  Speaker 2: the last month and a half, everyone and their grandmothers
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  Speaker 2: wanted to sell bonds. And now in a span of
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  Speaker 2: 24 hours, you get not one, but two news failures
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  Speaker 2: where you get hot inflation reports and bonds are finding
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  Speaker 2: bids left and right.
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  Speaker 4: So we defined two scenarios earlier this week where we
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  Speaker 4: could see a circumstance of interest rates coming down across
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  Speaker 4: the yield curve. And one of those was hey, inflation
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  Speaker 4: starts to moderate probably because of an energy price shock
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  Speaker 4: that slows down a little bit. We're getting the opposite
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  Speaker 4: of that right now. Inflation is proving that it's printing hotter.
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  Speaker 4: The other scenario we talked about with interest rates convincingly
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  Speaker 4: coming down over a long period of time would be
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  Speaker 4: genuine economic fears.
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  Speaker 2: And I think that's what's starting to be priced in
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  Speaker 2: at a very low level right now. Like, make no
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  Speaker 2: bones about it. Like, you're not seeing, like, recession being
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  Speaker 2: priced in.
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  Speaker 4: No.
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  Speaker 2: But I do think we need to take a look
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  Speaker 2: at equity markets, bond markets, to tell us what's going
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  Speaker 2: on in bonds. Like, why are bonds screaming lower based
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  Speaker 2: on hot inflation prints? And again, like, if you look at, like,
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  Speaker 2: break-evens and real rates right now, real rates are moving, but, like,
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  Speaker 2: I'm sorry, real rates are the bulk of the move
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  Speaker 2: that you're seeing. So it's not an inflation phenomenon that
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  Speaker 2: you're seeing adjusting here. It's a real growth phenomenon. We
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  Speaker 2: talked about this over the last month or so, that
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  Speaker 2: real rates were blowing out to the top side, which
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  Speaker 2: meant bonds were pricing in a vision where the U.S.
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  Speaker 2: economy grows at a faster rate over the next 5, 10,
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  Speaker 2: 30 years. Now you've got that reversing. And the reason
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  Speaker 2: why it's reversing, look no further... than who we talked
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  Speaker 2: about yesterday. CoreWeave, SanDisk, Intel, Oracle. That is where you're
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  Speaker 2: seeing the move. Actually, Oracle is, I believe, reversing up
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  Speaker 2: just a touch this morning. Yeah, Oracle's up like half
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  Speaker 2: a percent today. But CoreWeave down another 7.5% today after
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  Speaker 2: being down 16% yesterday. We've got it at one point
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  Speaker 2: today printing 59.51, which would be a new 52-week low
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  Speaker 2: if it closed there. And so what you are seeing
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  Speaker 2: here is that for some of these builders of data centers,
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  Speaker 2: people involved in any way, shape, or form in data
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  Speaker 2: center construction, you've got a little bit of a ripple
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  Speaker 2: that's happening here. And so the question that is being
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  Speaker 2: asked now, I'm not saying it's being answered, because if
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  Speaker 2: it were being answered negatively, then CoreWeave isn't being priced
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  Speaker 2: at $ 60 a share, it's at $ 0. The question that's
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  Speaker 2: being asked now is, hey, what if these business models
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  Speaker 2: aren't as robust as we thought they were?
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  Speaker 3: It's being asked, not answered.
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  Speaker 2: And so what I think is really interesting about this,
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  Speaker 2: in different ways, Mike, do you remember the fall of 2022?
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  Speaker 3: Yeah. I do. And my favorite.
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  Speaker 4: 2022 is my least favorite year in about the last
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  Speaker 4: decade for a number of reasons.
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  Speaker 3: Most investors.
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  Speaker 2: It was most investors' least favorite year in the last
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  Speaker 2: couple decades because, objectively, it was a horrible year for bonds,
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  Speaker 2: for stocks, for just about anything. But the interesting thing
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  Speaker 2: about 2022 is that in October of 2022, we got
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  Speaker 2: a CPI report. It came out on October 13th, and
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  Speaker 2: it was screaming hot And to the point where the
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  Speaker 2: S and P 500 at the time, think about how
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  Speaker 2: quaint this is just four years ago, S and P
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  Speaker 2: 500 had closed the night before at 3577. It opened
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  Speaker 2: at 3520. So about one and a half percent down,
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  Speaker 2: it went down to 3491. So like falls 2% from
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  Speaker 2: the previous close in the morning. And then just ratchets
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  Speaker 2: higher to close at 36.69, up 2.6% from the previous day,
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  Speaker 2: a 4.5% intraday reversal. Which is a mirror image of
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  Speaker 2: what we saw in bonds yesterday.
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  Speaker 3: Bonds open yesterday? Oh, no.
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  Speaker 2: And then they just catch that bid the rest of
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  Speaker 2: the day. And today, they haven't looked back. And look,
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  Speaker 2: that was the bottoms.
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  Speaker 3: In equities in 2022.
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  Speaker 2: And I'm not suggesting this is going to be the
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  Speaker 2: bottom in bonds, you know, forever, but I do think
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  Speaker 2: it's an interesting symmetry that you get there in terms
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  Speaker 2: of a hot October CPI. And in 2022 bonds found there,
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  Speaker 2: I'm sorry, stocks found their bottom 23, at least.
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  Speaker 3: Short-term like two days.
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  Speaker 2: So it's not, you know, count our chickens too far,
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  Speaker 2: but you've got bonds finding their bottom here. And part
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  Speaker 2: of this is just because bonds have been just so
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  Speaker 2: like heavily sold the last month or two. And so
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  Speaker 2: before we go to break, I do want to ask
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  Speaker 2: one question, Mike. Just because I got to take a
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  Speaker 2: victory lap on this one. Mike, did the fiscal situation
• 11:27
  Speaker 2: of the United States dramatically improve in the last 24 hours?
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  Speaker 3: Not that I'm aware of.
• 11:31
  Speaker 2: Then wire yields down. Tucker, go to break. We'll be
• 11:34
  Speaker 2: back in a minute.
• 11:35
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• 12:09
  Speaker 2: Mike, we spent the first segment talking about the inflation
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  Speaker 2: reports that we got the last couple days, which have
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  Speaker 2: been roasty. And in particular, like you look now, so
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  Speaker 2: the nice thing about the way that the calendar sets
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  Speaker 2: up these days is we get CPI, PPI, and then
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  Speaker 2: a couple weeks later we get PCE, which is what
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  Speaker 2: the Fed pays attention to. And the really nice thing
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  Speaker 2: these days is that every single investment bank out there
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  Speaker 2: has these little toy models that they plug all of
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  Speaker 2: the inputs from PPI and CPI into. And they're like, oh,
• 12:40
  Speaker 2: here's what PCE is going to be to the point
• 12:42
  Speaker 2: where I can't remember the last time we had a
• 12:45
  Speaker 2: PCE surprise.
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  Speaker 1: Right.
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  Speaker 2: You know, like no one gets surprised by PCE anymore
• 12:50
  Speaker 2: because with inflation having ratcheted up in the last five years,
• 12:53
  Speaker 2: like every investment bank built all these models. They're like, oh,
• 12:55
  Speaker 2: here's what's going to happen. It's not like it was
• 12:57
  Speaker 2: in the 2010s where, A, there wasn't any inflation, at
• 13:01
  Speaker 2: least elevated inflation, and B, no one spent time paying
• 13:05
  Speaker 2: attention to it because it was just like, okay, we
• 13:08
  Speaker 2: don't need to.
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  Speaker 3: Build a model for this. It doesn't matter.
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  Speaker 2: So where we stand now, the consensus projection for core PCE,
• 13:17
  Speaker 2: which is what the Fed watches, is now up to 0.34%.
• 13:21
  Speaker 2: And if you do the math on it, that comes
• 13:23
  Speaker 2: in at a 4.1% annualized rate for core PCE if
• 13:27
  Speaker 2: you were to repeat that over and over. Remember, the
• 13:30
  Speaker 2: best predictor of future inflation is current inflation. It tends
• 13:33
  Speaker 2: to be sticky at whatever level it's at. And so
• 13:38
  Speaker 2: this is something where you end up in this interesting
• 13:41
  Speaker 2: situation now. where you've got a growth scare going on,
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  Speaker 2: where investors are now suddenly concerned about AI and whether
• 13:50
  Speaker 2: it's sustainable. I'm not saying whether it will be or not.
• 13:52
  Speaker 3: I don't know. Again, it's just a question that's being asked.
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  Speaker 4: I mean, yeah, and it's displayed in a few places,
• 13:58
  Speaker 4: but the Philly Semiconductor Index is down 12% over the
• 14:01
  Speaker 4: last five days.
• 14:03
  Speaker 3: Which I'm told is not good.
• 14:04
  Speaker 1: Yeah.
• 14:05
  Speaker 2: So I think the interesting question here, it's now being
• 14:08
  Speaker 2: priced in a 73% chance the Fed does not hike in...
• 14:14
  Speaker 2: in the October meeting, which the interesting thing, so we've
• 14:16
  Speaker 2: gotten like two hot inflation reports, and the projections for
• 14:20
  Speaker 2: October have gone from 50-50 basically a month ago to
• 14:24
  Speaker 2: 75-25 today for doing nothing.
• 14:27
  Speaker 4: Compared to a week ago, they are a little bit
• 14:29
  Speaker 4: more likely to hike, but again, I'm not seeing much
• 14:32
  Speaker 4: of an impact on expectations here in spite of these
• 14:34
  Speaker 4: hot reports. No.
• 14:36
  Speaker 2: Now, December still looks to be a go, being priced
• 14:38
  Speaker 2: in at, like, a 90% chance today.
• 14:40
  Speaker 3: So, okay, like, I see you, December.
• 14:43
  Speaker 2: But you've got this interesting juxtaposition here where we've gotten
• 14:47
  Speaker 2: these hot inflation reports. But ultimately, remember, if the AI
• 14:53
  Speaker 2: spend cools down, it's been a major driver of growth
• 14:57
  Speaker 2: in the U.S.
• 14:57
  Speaker 3: Economy.
• 14:58
  Speaker 5: Yeah.
• 14:58
  Speaker 2: In two different ways. Number one is the actual economic
• 15:01
  Speaker 2: activity that's been happening. Shovels in the ground, construction jobs,
• 15:05
  Speaker 2: things along those lines, people laying miles of cable at
• 15:09
  Speaker 2: each data center. We see the real impact there. But
• 15:14
  Speaker 2: the other one that we've talked about at length is, hey,
• 15:17
  Speaker 2: stocks have gone up an awful lot in the last
• 15:19
  Speaker 2: few years. And so people that make their, not make
• 15:24
  Speaker 2: their living, but people that derive their income from their portfolios,
• 15:28
  Speaker 2: a lot of retirees and things like that, They felt
• 15:31
  Speaker 2: more comfortable spending, and so that's been a driver of
• 15:33
  Speaker 2: consumer spending as well.
• 15:35
  Speaker 3: Yeah, we've had a.
• 15:35
  Speaker 4: Huge wealth effect change on the both wealthiest and largest
• 15:40
  Speaker 4: portion of the population, the baby boomers.
• 15:43
  Speaker 2: So the thing that I think markets are now going
• 15:45
  Speaker 2: to have to wrestle with is, hey, we've got this
• 15:48
  Speaker 2: higher inflation that is potentially stickier because, again, it's showing
• 15:53
  Speaker 2: up in core areas. Diesel percolates out everywhere. And remember,
• 15:57
  Speaker 2: all of us were alive back in 2008. I think
• 16:02
  Speaker 2: a lot of people forget, but personally I remember because
• 16:04
  Speaker 2: the cost of beer went up and never came down.
• 16:06
  Speaker 2: But remember, oil went to $ 150 a barrel and gas
• 16:09
  Speaker 2: was sky high. That was before the Ukraine war. Those
• 16:12
  Speaker 2: were the highest gas prices we had ever seen. And
• 16:17
  Speaker 2: it's not like, again, I was in college at the time.
• 16:19
  Speaker 2: It's not like when oil prices went down when the
• 16:22
  Speaker 2: bubble popped. My beer didn't get cheaper.
• 16:26
  Speaker 3: Yeah, prices don't come down.
• 16:28
  Speaker 2: It's not how it works. So I think that this
• 16:31
  Speaker 2: is the thing that we're going to have to wrestle with,
• 16:33
  Speaker 2: which is, okay, you've got this elevated inflation here. But
• 16:38
  Speaker 2: if the AI bubble does pop, and it's an if, like,
• 16:41
  Speaker 2: let's not get ahead of ourselves. This is just the
• 16:44
  Speaker 2: question that's being asked right now. If it does, is
• 16:49
  Speaker 2: the inflation that's present still going to be present because
• 16:53
  Speaker 2: of being caused by factors outside of AI in a
• 16:56
  Speaker 2: lot of cases? And so do we end up in
• 17:00
  Speaker 2: that stagflationary scenario? It's a question worth asking. I don't
• 17:04
  Speaker 2: think we need to go further than that right now
• 17:06
  Speaker 2: because everyone likes to then be like, well, it's going
• 17:09
  Speaker 2: to be stagflation.
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  Speaker 3: I'm like, my dude's in economics. We've had like one
• 17:16
  Speaker 3: and a quarter.
• 17:17
  Speaker 2: stagflationary episodes in the United States in the last 50 years.
• 17:21
  Speaker 3: Let's not get ahead of ourselves here. Yeah.
• 17:25
  Speaker 4: The other piece on this is the borrowing cost aspect
• 17:28
  Speaker 4: of it, right? The hyperscalers have been causing massive economic growth,
• 17:34
  Speaker 4: and to your point, I don't think we should count
• 17:36
  Speaker 4: that as dead after two days of concern about a
• 17:40
  Speaker 4: company like CoreWeave that we'll get to. But... they've also
• 17:46
  Speaker 4: been borrowing outlandish amounts of money that have driven up
• 17:50
  Speaker 4: interest rates for all other areas of the economy.
• 17:52
  Speaker 3: And so, I don't know, to me, Chuck, I know
• 17:55
  Speaker 3: we have a new Fed chair in there.
• 17:56
  Speaker 4: I know he thinks differently about the economy than Jay
• 17:59
  Speaker 4: Powell did. But the one thing that's been pretty darn
• 18:03
  Speaker 4: consistent about this Federal Reserve for, I don't know, the
• 18:07
  Speaker 4: last 25 years, is that when left with a question,
• 18:11
  Speaker 4: they've erred on the side of lower interest rates.
• 18:14
  Speaker 3: You know, whenever justifiable, they have erred on the side
• 18:18
  Speaker 3: of lower interest rates.
• 18:19
  Speaker 4: And so for once, I think the markets are getting
• 18:21
  Speaker 4: it right this time, right? If Warsh and the gang
• 18:25
  Speaker 4: see these high inflation reports, but they also see any
• 18:28
  Speaker 4: hint of a question on, you know, slowdown coming from
• 18:34
  Speaker 4: other sectors of the economy, then I think they err
• 18:37
  Speaker 4: on the side of, yep, we'll keep things where they
• 18:39
  Speaker 4: are and readjust in December in spite of, you know,
• 18:42
  Speaker 4: what I think is Very clearly some accelerating inflation concerns.
• 18:46
  Speaker 3: Probably.
• 18:48
  Speaker 2: The wild card in this is Warsh.
• 18:49
  Speaker 3: Yeah.
• 18:50
  Speaker 2: You know, Warsh, remember, historically was very hawkish on inflation.
• 18:57
  Speaker 2: During his campaign to be Fed chair, took a more
• 19:03
  Speaker 2: dovish tact in terms of how he was speaking about it.
• 19:07
  Speaker 3: And now that he is Fed chair.
• 19:10
  Speaker 2: has talked hawkishly, but not necessarily acted as hawkishly as
• 19:13
  Speaker 2: he has talked. So I think the wild card in
• 19:16
  Speaker 2: this is we're still trying to understand exactly what Warsh
• 19:20
  Speaker 2: wants to do from an action perspective at the Fed.
• 19:23
  Speaker 2: What is the reaction function if this happens, then this
• 19:27
  Speaker 2: is the response? We don't know yet. It may be
• 19:31
  Speaker 2: different from prior Feds. It may not.
• 19:33
  Speaker 3: So that's something to watch.
• 19:34
  Speaker 2: Quick break here.
• 19:35
  Speaker 3: Wall Street Watch is next.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:47
  Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
• 19:52
  Speaker 1: Tracking the stocks, the data, and the headlines driving markets
• 19:56
  Speaker 1: so far today, right here on the Financial Exchange Radio Network.
• 20:00
  Speaker 5: The AI sell-off continues on Wall Street due to overspending concerns. However,
• 20:05
  Speaker 5: investors are reacting to yet another hotter than expected inflation reading.
• 20:10
  Speaker 5: Right now, the Dow is up two-thirds of a percent
• 20:14
  Speaker 5: or 342 points higher. S & P 500 is down
• 20:18
  Speaker 5: nearly two-tenths of 1% or 13 points lower. NASDAQ selling
• 20:22
  Speaker 5: off three-quarters of a percent or 201 points off. Russell
• 20:26
  Speaker 5: 2000 is up over half a percent. 10-year treasury yield
• 20:30
  Speaker 5: is down 14 basis points at 5.048%. Crude oil is
• 20:36
  Speaker 5: up about 1.5%, trading at $ 96 a barrel, while Brent
• 20:40
  Speaker 5: is at $ 105 a barrel. CoreWeave shares continue to plunge,
• 20:44
  Speaker 5: with traders concerned about the cloud computing company's financing around
• 20:47
  Speaker 5: its data center buildouts with huge amounts of debt. After
• 20:51
  Speaker 5: its 15% tumble yesterday, CoreWeave stock is down another 7% today. Meanwhile,
• 20:57
  Speaker 5: Anthropic told prospective investors... Its third quarter revenue hits $ 16. 8
• 21:03
  Speaker 5: billion as the AI company pushes ahead with plans for
• 21:06
  Speaker 5: its IPO. Elsewhere, Rocket Lab dropping 12% after the aerospace
• 21:10
  Speaker 5: firm delayed its maiden launch of its Neutron rocket to 2027.
• 21:14
  Speaker 5: Walmart upgraded by Deutsche Bank, citing a positive 2027 outlook.
• 21:19
  Speaker 5: Walmart shares are up over 3%. And Crocs upgraded by Barclays,
• 21:24
  Speaker 5: noting the footwear company's progress on Product innovation in category expansion.
• 21:29
  Speaker 5: Croc shares are up by 5%. I'm Tucker Silva, and
• 21:34
  Speaker 5: that is Wall Street Watch.
• 21:41
  Speaker 2: What we were talking about for inflation and rates right now,
• 21:43
  Speaker 2: do you want to move and focus a little bit
• 21:45
  Speaker 2: more on what we're seeing on the AI side of things?
• 21:47
  Speaker 3: I do, yeah. We can revisit what we saw.
• 21:50
  Speaker 4: Again, the headlines, worst PPI reading since 2022, pretty rough
• 21:55
  Speaker 4: CPI reading. We'll revisit it around 11 if you missed
• 21:58
  Speaker 4: any of it, so tune in.
• 22:00
  Speaker 2: So let's talk a little bit about what we're seeing
• 22:02
  Speaker 2: in stocks because really interesting thing developing right now. Mike,
• 22:06
  Speaker 2: as of this very moment, is the S & P
• 22:07
  Speaker 2: 500 up or down? Last look, it was slightly down.
• 22:11
  Speaker 2: It's down about a quarter percent right now. Piece of
• 22:14
  Speaker 2: data that I don't know if you have front and center.
• 22:17
  Speaker 2: As of right now, are more S & P 500 stocks.
• 22:19
  Speaker 3: Up or down? Don't know.
• 22:23
  Speaker 1: Up.
• 22:23
  Speaker 2: 201, actually, more stocks right now are up in the
• 22:26
  Speaker 2: S & P 500 than down. And so this gets
• 22:28
  Speaker 2: to the interesting juxtaposition that we've been covering all year,
• 22:31
  Speaker 2: which is that this has been a very narrow market generally.
• 22:34
  Speaker 2: When AI stocks are leading, and remember, AI stocks now
• 22:37
  Speaker 2: make up Depending on whose tracker you want to use
• 22:40
  Speaker 2: on this, anywhere from 40% to 50% of the S
• 22:43
  Speaker 2: & P 500 by.
• 22:46
  Speaker 3: Overall market cap. Can we run through that math real quick?
• 22:50
  Speaker 3: Which math?
• 22:52
  Speaker 4: How you get there, because it's almost the entire tech sector,
• 22:54
  Speaker 4: which is about 40% of the S & P 500.
• 22:56
  Speaker 3: But I would take out Apple.
• 22:59
  Speaker 4: Yeah, I think you can pull out Apple. You add
• 23:02
  Speaker 4: in Amazon, who's in consumer discretionary. You would add in
• 23:06
  Speaker 4: Meta and Alphabet, which are in communications.
• 23:10
  Speaker 5: Yep.
• 23:10
  Speaker 4: And that gets you to around 40 to 45 percent,
• 23:13
  Speaker 4: if I'm not mistaken.
• 23:14
  Speaker 3: Yes, exactly.
• 23:16
  Speaker 2: So I think that when you look at this market,
• 23:19
  Speaker 2: we've talked a lot that the safest this market has been,
• 23:21
  Speaker 2: it's been a little bit backwards from how it normally is.
• 23:24
  Speaker 2: Because normally you say, well, I want lots of stocks
• 23:26
  Speaker 2: participating because that means that the economy is doing well
• 23:29
  Speaker 2: and it's diversified, blah, blah, blah.
• 23:33
  Speaker 3: I get it.
• 23:33
  Speaker 2: But since 2023, the safest this market has been has
• 23:36
  Speaker 2: been when the big boys in AI are chugging along.
• 23:42
  Speaker 2: We've had multiple instances, summer of 2024, spring of 2025,
• 23:44
  Speaker 2: fall of 2025, spring of 2026, where AI stocks took
• 23:46
  Speaker 2: a breather. And the market either fell flat on its
• 23:55
  Speaker 2: face or just tripped and stumbled and somehow didn't fall.
• 23:59
  Speaker 2: And so the interesting thing to me is, look, you've
• 24:01
  Speaker 2: got AI companies stumbling once again.
• 24:04
  Speaker 3: This is not a fall on your face.
• 24:06
  Speaker 2: You can't say the market fell on its face when
• 24:08
  Speaker 2: you're 1.25% from all-time highs. Let's not be dumb about this.
• 24:13
  Speaker 2: But the market's stumbling a little bit for two days. Mike,
• 24:17
  Speaker 2: yesterday was the first 1% down day in the S
• 24:19
  Speaker 2: & P 500 in like 53 sessions, I think. It
• 24:22
  Speaker 2: was either 53 or 57. It's the seventh longest streak
• 24:26
  Speaker 2: in history without a 1% down day.
• 24:28
  Speaker 1: It's insane.
• 24:30
  Speaker 2: So you've got markets stumbling a little bit because, hey,
• 24:34
  Speaker 2: there's so much market cap tied up in these AI
• 24:37
  Speaker 2: companies right now that even though you have 200 more
• 24:41
  Speaker 2: companies up than down in the S & P 500, again,
• 24:44
  Speaker 2: you look at the math right now, it's about 350
• 24:46
  Speaker 2: of them up, 150 of them down, and that 150
• 24:50
  Speaker 2: down is just such a big weighting that it's dragging
• 24:53
  Speaker 2: the index down a little bit. The NASDAQ is off
• 24:56
  Speaker 2: about 1%, even though the S & P is off
• 24:58
  Speaker 2: less than a quarter. And so this is what you
• 24:59
  Speaker 2: get here. But I think ground zero for this right
• 25:02
  Speaker 2: now is very much what we are seeing from CoreWeave
• 25:07
  Speaker 2: and Oracle. But CoreWeave is really at the epicenter of
• 25:11
  Speaker 2: this thing.
• 25:12
  Speaker 1: Yeah.
• 25:13
  Speaker 2: You know, CoreWeave stock at the moment is off another
• 25:16
  Speaker 2: 7% today. And I just, like, I have to read, like, again,
• 25:22
  Speaker 2: some of the stuff that's out there in this Bloomberg piece,
• 25:25
  Speaker 2: just because it's kind of wild. Corweave's bond's doing 2032.
• 25:30
  Speaker 2: So 2032 is, what, six years out from now? Their
• 25:35
  Speaker 2: bonds over the past week, their six-year bonds, have gone
• 25:40
  Speaker 2: from $ 83. So they were already trading below par. They
• 25:43
  Speaker 2: were at par as recently as June. So they'd already
• 25:47
  Speaker 2: traded down 17% since June. And then they fell another
• 25:50
  Speaker 2: 5% in the last week. And so it's below 80
• 25:54
  Speaker 2: cents on the dollar, which is territory where things start
• 25:57
  Speaker 2: getting a little bit gnarly. And yields on them, you're
• 26:01
  Speaker 2: talking like 15% yields, which means if they need to
• 26:04
  Speaker 2: issue new debt, they're paying those rates, not the 9%
• 26:07
  Speaker 2: that they originally financed at. And so it's really raising
• 26:12
  Speaker 2: questions as to, okay, so if you are CoreWeave, and
• 26:16
  Speaker 2: I think today I'm thankful I'm not, but again, who
• 26:20
  Speaker 2: knows how this plays out, but just... Look at the
• 26:22
  Speaker 2: math on this. Corweave's revenue is about $ 7. 5 billion. They
• 26:27
  Speaker 2: have about $ 50 billion in debt outstanding, which is insane because, again,
• 26:35
  Speaker 2: you're basically lending all on just promises. There isn't enough
• 26:38
  Speaker 2: revenue to actually make a company yet. And so that debt, again,
• 26:43
  Speaker 2: let's say it's yielding like 8%, 9%. So they're paying
• 26:46
  Speaker 2: $ 4 billion a year in covering their debt cost alone.
• 26:51
  Speaker 2: Then you've got to actually do the whole business thing.
• 26:54
  Speaker 2: And so it's just how do we grow into this?
• 26:57
  Speaker 2: Their free cash flow is negative $ 13 billion year over year.
• 27:00
  Speaker 2: Their operating margins are negative. They don't have any profits.
• 27:04
  Speaker 2: In fact, their net income position has worsened since a
• 27:08
  Speaker 2: year ago. A year ago, they had lost $ 1 billion
• 27:12
  Speaker 2: in the trailing 12 months. Now they've lost $ 2 billion.
• 27:15
  Speaker 2: So I guess their economies of scale are that when
• 27:17
  Speaker 2: we scale, we lose more money so far. And again,
• 27:22
  Speaker 2: this is a commoditized space. It's not like they have
• 27:25
  Speaker 2: like any unique intellectual property. They just know how to
• 27:29
  Speaker 2: build data centers, but so do a lot of other people.
• 27:31
  Speaker 2: And so it's kind of like, well, what is it
• 27:34
  Speaker 2: you say you do around here? Look, they're arguably first, right?
• 27:38
  Speaker 3: I mean, just like Lycos and Ask Jeeves.
• 27:41
  Speaker 1: Right.
• 27:42
  Speaker 4: And we talk about the AI build out in this
• 27:44
  Speaker 4: race to be first and core. We've They might not
• 27:47
  Speaker 4: be literally first, but they were among the first to
• 27:50
  Speaker 4: be able to do what they are doing. They're one
• 27:52
  Speaker 4: of NVIDIA's probably largest, what do you think, six customers?
• 27:58
  Speaker 3: Yeah. Yeah, I think that's reasonable.
• 28:00
  Speaker 4: I'm guessing that they account for between 5% and 10%
• 28:04
  Speaker 4: of total NVIDIA sales. They were one of the first
• 28:07
  Speaker 4: to be able to do what they're talking about doing.
• 28:10
  Speaker 1: And.
• 28:12
  Speaker 4: I think that's in part why this matters so much
• 28:15
  Speaker 4: that they are sinking so heavily. The quote from the
• 28:19
  Speaker 4: CEO just... This is a bad look, I gotta say.
• 28:22
  Speaker 3: It's not a CEO, sorry. I apologize. Co-founder.
• 28:26
  Speaker 4: Do you want to read the exact quote? He wanted
• 28:30
  Speaker 4: to go get.
• 28:31
  Speaker 2: Let me find it in the piece just because I
• 28:34
  Speaker 2: read it and I was like, Oh, dear.
• 28:37
  Speaker 3: Yeah, you can't say that part out loud.
• 28:40
  Speaker 4: What he was quoted as saying is that the company's
• 28:43
  Speaker 4: goal is to get an investment-grade credit rating and gain
• 28:46
  Speaker 4: the privilege of borrowing unlimited.
• 28:48
  Speaker 3: Pools of money. Oh, no, this wasn't the one that
• 28:51
  Speaker 3: really bothered me. Oh, no? Okay, what do you have?
• 28:53
  Speaker 2: Well, that one I looked at, and I'm like, okay,
• 28:56
  Speaker 2: so basically you're hoping that the rating agencies will look
• 28:59
  Speaker 2: at you and like, Yeah, then you have all this
• 29:02
  Speaker 2: insurance money that can buy your debt and, okay, you'll
• 29:05
  Speaker 2: be able to finance yourself. I found that kind of problematic.
• 29:08
  Speaker 2: But everyone kind of knew that that was the game
• 29:12
  Speaker 2: for them. The one that I found to be the
• 29:14
  Speaker 2: problem was from the CEO, from an internal email that
• 29:20
  Speaker 2: Bloomberg has seen. Quote, when you're building a new type
• 29:23
  Speaker 2: of technology company, there will be periods of time when
• 29:25
  Speaker 2: the market misunderstands and acts irrationally. Mike, I don't know
• 29:28
  Speaker 2: too many things, but I know that when you start
• 29:29
  Speaker 2: to think about it, extraordinary quality of our execution and
• 29:31
  Speaker 2: the relentless discipline around the financial engine we've built. Mike,
• 29:36
  Speaker 2: I don't know too many things, but I know that
• 29:39
  Speaker 2: when you start getting CEOs saying, well, the market just
• 29:42
  Speaker 2: doesn't understand us, that's not a great sign.
• 29:46
  Speaker 3: Sounds like Peloton.
• 29:49
  Speaker 2: It's like, no, you know what I really get from this,
• 29:52
  Speaker 2: to be honest, is we work. That's what it feels like.
• 29:58
  Speaker 2: It's like, Oh, we're a different type of office company. Well,
• 30:03
  Speaker 2: Allbirds wasn't like this. Allbirds didn't say like the market
• 30:06
  Speaker 2: didn't understand us. They just had this inflated sense of like, we're.
• 30:10
  Speaker 3: Not just a shoe company. We're a company company. Yeah.
• 30:14
  Speaker 3: It's like, I don't know what that means.
• 30:17
  Speaker 2: This is kind of like I remember when WeWork was
• 30:19
  Speaker 2: starting to go bad and it was like, well, the
• 30:22
  Speaker 2: market just doesn't get that. Like, you know, they don't
• 30:25
  Speaker 2: understand how our structure works. They don't understand our leases.
• 30:29
  Speaker 2: And this feels like that kind of statement. So, again,
• 30:34
  Speaker 2: they're going to have to prove that that's not the
• 30:36
  Speaker 2: case here. And they have the opportunity to. Again, I
• 30:39
  Speaker 2: think the market right now is in the just asking
• 30:42
  Speaker 2: questions phase of this. because if they were beyond that,
• 30:46
  Speaker 2: CoreWeave wouldn't be trading at $ 60 a share. It would
• 30:49
  Speaker 2: be trading at zero. So, like, the company is still worth,
• 30:54
  Speaker 2: and again, this just tells you how, like, crazily valued
• 30:57
  Speaker 2: these companies are, still worth $ 35 billion right now. Even
• 31:02
  Speaker 2: with the pullback they've seen, they are still trading five
• 31:06
  Speaker 2: times revenue, which is steep. But, again, these are just
• 31:11
  Speaker 2: the questions that are being asked here, but I got
• 31:13
  Speaker 2: to tell you, like, Both of those quotes, the one
• 31:15
  Speaker 2: from the CEO and the one from the co-founder, you
• 31:18
  Speaker 2: look at it and you're just like, ooh, I'm.
• 31:22
  Speaker 3: Not sure about that. Yeah. Tough vibes.
• 31:26
  Speaker 2: But look, here's the other thing I'll say about artificial
• 31:30
  Speaker 2: intelligence companies. I can count on my hands at least
• 31:34
  Speaker 2: three separate instances in the last two years where we've
• 31:37
  Speaker 2: been like, okay, here's a question that they're going to
• 31:40
  Speaker 2: have to answer.
• 31:42
  Speaker 3: And they've answered it every time. Yep.
• 31:44
  Speaker 2: So they still can't answer it this time. I'm very
• 31:48
  Speaker 2: much not saying this is it, but I am saying
• 31:51
  Speaker 2: this is a new question they've got to answer, and
• 31:55
  Speaker 2: we'll see what they come up with in the coming quarters.
• 31:58
  Speaker 2: Let's take a quick break. When we return, we're talking
• 32:01
  Speaker 2: diesel next.
• 32:02
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• 32:29
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• 32:36
  Speaker 2: Mike, we got a piece in the New York Times.
• 32:38
  Speaker 2: It's titled, Why Trump's Diesel Deal with Putin Won't Knock
• 32:41
  Speaker 2: Down High Prices.
• 32:43
  Speaker 3: And the answer is.
• 32:44
  Speaker 2: Well, there still just isn't enough diesel, and it's not
• 32:47
  Speaker 2: clear that Russia can actually export what they want to,
• 32:52
  Speaker 2: and it's not clear that anyone will actually buy it
• 32:56
  Speaker 2: because they still might be worried about sanctions being reimposed
• 32:58
  Speaker 2: at some point.
• 32:59
  Speaker 4: I guess final point on this, just the volume here.
• 33:02
  Speaker 4: Aren't we talking about approximately one day of U.S.
• 33:05
  Speaker 3: Demand being supplied?
• 33:09
  Speaker 2: For the first month, it's actually 15 hours.
• 33:10
  Speaker 1: So....
• 33:13
  Speaker 3: Yeah, even if it all.
• 33:14
  Speaker 4: Did come through, I mean, I don't know, maybe it's
• 33:17
  Speaker 4: helping a little bit on like five cents a gallon
• 33:20
  Speaker 4: on diesel, the threat of this diesel moving into the market.
• 33:23
  Speaker 4: But yeah, it doesn't seem like it's going to be
• 33:25
  Speaker 4: heavily impactful and sure does seem.
• 33:27
  Speaker 3: Like it comes with some political consequences.
• 33:29
  Speaker 2: No, I mean, you look at the move in diesel
• 33:32
  Speaker 2: futures just since this was announced and they haven't budged.
• 33:37
  Speaker 2: There has been no move. And so the market is
• 33:40
  Speaker 2: telling you, Okay, we don't think this is going to
• 33:42
  Speaker 2: be impactful because, remember, we're at a point in the
• 33:46
  Speaker 2: diesel demand curve that it's so steep that small changes
• 33:50
  Speaker 2: in supply can have a huge impact on price in
• 33:52
  Speaker 2: either direction. The fact that this isn't having a huge
• 33:56
  Speaker 2: impact on price is telling, in my opinion, that the
• 33:59
  Speaker 2: market doesn't really think it's going to make a difference.
• 34:03
  Speaker 2: So there's that.
• 34:04
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• 35:01
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• 35:03
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• 35:09
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• 35:12
  Speaker 2: Mike, we got a piece from Connor said in the
• 35:14
  Speaker 2: housing frame talking about what potentially a bad 2027 for
• 35:19
  Speaker 2: housing would look like. Connor and I have been of
• 35:21
  Speaker 2: the same opinion for much of this year in that things,
• 35:25
  Speaker 2: even though this year weren't looking great. So 2027 and
• 35:30
  Speaker 2: 2028 were potentially really constructive years because of excess inventory
• 35:34
  Speaker 2: having cleared in some of the markets that typically see
• 35:37
  Speaker 2: the most building, places like Florida, Georgia, Texas, things like that.
• 35:42
  Speaker 2: And so we were kind of both singing from the
• 35:45
  Speaker 2: same sheet of music in that, hey, like 2027 and
• 35:48
  Speaker 2: or 2028 could be really good years for builders as
• 35:51
  Speaker 2: housing starts to kick in again. The question that Conor
• 35:54
  Speaker 2: raises here, and again, he's not saying it's a certainty,
• 35:56
  Speaker 2: he's like, what would a bad year next year look like?
• 35:59
  Speaker 3: I would say it looks a lot like 2026.
• 36:02
  Speaker 2: Probably like this. The most likely one that he points
• 36:05
  Speaker 2: out is, look, if rates go up, you probably just
• 36:08
  Speaker 2: continue to see low volumes and not very much in
• 36:10
  Speaker 2: the way of price appreciation. The case that I think
• 36:14
  Speaker 2: he makes for housing being worse next year is if
• 36:18
  Speaker 2: the AI bubble does pop... You do end up with
• 36:21
  Speaker 2: some job loss then, which hurts the number of people
• 36:23
  Speaker 2: that can buy homes. You also see markets take somewhat
• 36:28
  Speaker 2: of a beating probably in terms of where equities fall to.
• 36:33
  Speaker 2: And so that wealth effect unwinds a little bit. And
• 36:35
  Speaker 2: particularly probably in the top end, you can't see as
• 36:38
  Speaker 2: many transactions. But remember, a lot of homes are priced higher.
• 36:42
  Speaker 2: pretty crazily now that you need, you know, significant assets
• 36:44
  Speaker 2: in order to make down payments and things like that.
• 36:47
  Speaker 2: And so even away from the top end, you could
• 36:48
  Speaker 2: see a reduction in volumes as pricing tries to adjust
• 36:52
  Speaker 2: to what people can afford if equities saw a significant
• 36:56
  Speaker 2: dip that lasted for more than, you know, three days
• 36:58
  Speaker 2: like they have for the last couple of years.
• 37:00
  Speaker 4: Yeah, I'm with you on that. Like a recession is
• 37:03
  Speaker 4: not going to be good for housing. Part of the
• 37:06
  Speaker 4: equation is also where do interest rates reset to in
• 37:10
  Speaker 4: an environment like that? Again, interest rates aren't going to
• 37:14
  Speaker 4: save a housing market if you get a recession. Go
• 37:16
  Speaker 4: see 2011. But it sure does seem to me that
• 37:21
  Speaker 4: there's a lot of pent-up demand on the part of
• 37:23
  Speaker 4: people to move, upgrade their home, and are hesitant to
• 37:27
  Speaker 4: do so because of particularly high interest rates. And so
• 37:31
  Speaker 4: it really depends on what sort of event we are
• 37:36
  Speaker 4: talking about here, because there's a big difference between 2008 and.
• 37:42
  Speaker 3: You know, any sort of other market downturn slash recession. Yeah.
• 37:46
  Speaker 2: So I think, you know, we'll see how this develops. Again,
• 37:49
  Speaker 2: I generally have been constructive on where housing could go
• 37:53
  Speaker 2: the next couple of years, but we'll see, like keep
• 37:57
  Speaker 2: an open mind. Again, it's very much not saying like
• 38:00
  Speaker 2: this is set in stone, but much more, okay, there
• 38:04
  Speaker 2: are new risks that have developed in the last month
• 38:06
  Speaker 2: or two, one being higher rates, the other being, you know,
• 38:09
  Speaker 2: AI kind of that, that, ecosystem deflating. And if either
• 38:13
  Speaker 2: of those develop next year, that would throw a little
• 38:14
  Speaker 2: bit of a wrench in the gears. Quick break here.
• 38:17
  Speaker 2: We got hour two coming up in a bit.